How To Invest In Commercial Real Estate: Guide For Toronto

Has the thought of investing in commercial real estate crossed your mind or are you busy trying to figure out how this side of real estate works?

Assuming your answer is a huge “yes”, we’ve got you covered. To start you off, understand that there’s a lot to learn on your journey to successful commercial property investment.

Not everything you may have picked up or experienced while dealing with the residential side is applicable to this commercial side. The two sides actually differ on many fronts, from the market factors and financing requirements to potential risks, the leasing arrangement, property management options, among other aspects.

That aside, one of the greatest things about this side of real estate is that it gives you the opportunity to meet a new set of clients and elevate your business as an investor.

What we are about to look at is essentially what you should be aware of as you plan to get your feet wet in commercial real estate in Toronto.

Finding The Best Property Investment Opportunities

First thing to note is that unlike residential investing, this type of investing takes far more time. For example, the sales cycles are longer, a situation that calls for patience from the investor. Carrying out due diligence can take months. Landing an ideal tenant won’t be as quick as you’d expect, considering that the process often requires the help of a commercial property management company specialized in tenant screening.

Generally, without patience, you’ll be exposing yourself to mistakes that could lead to failure. That said, here’s where you should begin in your pursuit for the best commercial real estate investing opportunities.

Understand Toronto’s Real Estate Market

Before proceeding with any decision on where to buy your real estate property, spare some time to learn and understand the market you plan to invest in. Familiarize yourself with:

Interest rates

In mid-2017, the Bank of Canadaraised its interest rate, a first in seven years. Such a move usually has an influence on the cost of borrowing on variable rate mortgages and other loans. The reason you should watch out for any increase (or decrease) is because an increase affects the growth of companies and consumer spending, which in turn affects demand for commercial and residential properties.

Area Demographics

Demographics and things like population growth count as predictive tools that can help you as an investor figure out market dynamics. Think of it this way. Different segments of the population may be motivated to move to one place or the other or purchase a home in a specific neighborhood due to life events like starting a family, getting married, receiving a promotion or raise, the need for a retirement home, and so on.

As they move and settle in these places, new opportunities will arise. For instance, there will be a demand for things like childcare facilities, places to shop, eat, or hang out. A place with a high concentration of boomers will definitely create demand for healthcare services.

Chances are many of the people in these demographics will seek these services in places that are close to their homes, a situation that can fuel demand for office or commercial space for those looking to meet the needs of these people.

Similarly, locations with a strong population growth may require additional services due to the rising consumer demand. More cafés, grocery stores, support services, specialty shops, etc. will be needed. This translates to a demand for more commercial space.

Other factors that are just as important to familiarize yourself with include:

Tax matters (both at the federal and provincial levels)

Property ownership – Learn about the requirements and rights related to ownership of property as a Canadian citizen, permanent resident, and non-resident.

Competition

Environmental Issues

Investment options available – Apartments, income properties, mixed-use properties, flipping, new construction, etc. Learn about the advantages, disadvantages, and risks of these.

Supply of skilled labor

Some of the aforementioned aspects, like tax and purchase laws, financing, and property ownership undergo changes more often. Therefore, you’ll have to keep yourself up to date just so that you don’t end up making costly decisions.

Once you’ve understood Toronto’s real estate market, the next thing you’ll want to focus on is how one can find a list of commercial real estate properties that tick all the boxes in relation to their needs.

How One Can Find a List of Commercial Real Estate Properties:

I. Real Estate Listings – Toronto has several platforms where you can find, list, or market your property. Examples of where to find commercial listings in Toronto include diffTheDirt.co, TheRedPin.com, Realtor.ca, homebuyers.com, zoocasa.com, just to name but a few.

II. Real Estate Agent – A real estate agent can be an answer to so many of your needs as an investor looking for properties to invest in in Toronto. That includes helping you find a great investment property(s). Arrange to meet with one the earliest you can. Find out if the agent is an expert in Toronto’s real estate. Find satisfactory answers to the following: Can they work around your schedule? Are they responsive and tech-savvy? Do you connect?

III. Real Estate Investment Clubs (REI) – REI clubs basically bring real estate investors together to network, discuss, and learn more about the industry. You don’t really have to be an accomplished or experienced real estate investor to join one in Toronto. Provided you are eager to learn, that’s enough. Members get access to a variety of resources, including materials on advertisement and access to commercial properties at wholesale prices.

IV. Approach Owners Directly – In a competitive real estate market, like Toronto’s, finding a great deal can be hard given the huge number of investors looking for prime investment properties. One trick you can use to circumvent this challenge is contact owners directly, especially absentee ones (could be those unsure of what to do with their property or landlords who dislike their tenants). Request them to consider selling their property. You might be lucky if you get to them before they list their property with a real estate agent.

V. Friends and Family – At first, it might feel like you are bothering your family and friends asking them to offer any information they come across about commercial real estate properties for sale in Toronto. Nevertheless, it’s worth giving the thought a try. A good way to start is to get their permission. Expect some yes and nos. No matter the result, don’t be discouraged.

How To Know If You’ve Found The Best Property

You’ve understood the ins and outs of Toronto’s real estate market, checked out local real estate listings or enlisted the help of a real agent. Maybe you’ve joined a real estate investment club or acted on one of the ways we’ve just talked about, and bingo! You now have one or multiple properties at your disposal and are wondering, “how do I know I’ve found the right investment?”

Here’s how:

Does The Property Meet Your Objectives?

What do you hope to achieve out of your real estate investment? Make hundreds or thousands of dollars in positive cash flow every month? Sell it at a later date and hopefully make your dream profit?

Whichever goal you have, you need to be fully sure that the property(s) you pick has the potential to produce positive cash flow or appreciate in value over time. Find out how much it’s going to cost you and the amount it will give back, and if pleased with the results, go ahead with it.

There are various calculations, like the Gross Rent Multiplier (GRM), which can help you figure out the expected cash flow from a property. It’s computed by taking the asking/purchase price then dividing it by annual rental income.

Here’s an example:

Asking price: $300,000

Monthly rent: $2,500

GRM = $300,000/ ($2,500 x 12) = 10

Generally, if a potential investment property has a GRM of about 10 or less, it’s more likely to deliver a neutral or positive cash flow. If it’s beyond that, you risk dealing with negative cash flow if you proceed with the deal.

Regarding how much the property is likely to grow by and if it will offset the loss incurred and earn you good profits in the end, the truth is it’s hard to tell. Earlier this year, realtors termed Toronto’s real estate market as volatile.

Some real estate professionals equate this kind of investment to a gambler’s game – you might win sometimes, other times you will lose. What this means is that you’ll be taking a huge risk making appreciation your primary focus.

A better strategy would be to analyze the cash flow first before shifting your focus to capital growth. A positive cash flow can act as your green light. However, if the monthly cash flow is negative, it would be another huge risk to stay on, hoping that you’ll dispose of the property at a profit later and recover all your losses.

Is The Vacancy Rate Rising Or Constant?

If you are the kind of investor who plans to rent out their property for a couple of years to come, your other objective should be to have your investment in a place with a low, stable, or dropping vacancy rate.

As much as you could have a property with an enticing GRM, say 4 or 5, if the area has a high vacancy rate (more than 10%), you stand a possibility of dealing with irregular cash flow and financing nightmares.

Information about vacancy rate can be sourced from Canada Mortgage and Housing Corporation (CMHC) reports. Observe the pattern from previous years, study the reasons for the variation (if any), and if possible, seek the opinion of an investment consultant.

If you don’t have any convincing reasons that the rate will be dropping soon, it would be better to walk away from the investment and wait until the rate begins to drop to reconsider investing there again.

Has Your investment Consultant Okayed It?

In case you’ve not enlisted the help of one, note that a Toronto-based investment consultant’s main role, in general, is to advise you on how to invest in commercial real estate and furnish you with details about the prevailing situation in the industry.

Whether it’s formulating a strategy to finding a great investment property, managing your purchases, or building your portfolio, they can do it all.

Whatever objective you may have, their help will be key in ensuring you are maximizing the potential your investment has.

You will definitely come across several of them as you seek the best person to consult with. Make sure the company you choose has a great reputation, experience, connections, resources, and everything else that would be key in realizing your dream.

At Buttonwood, we are open to your questions and concerns and ready to help you make an investment decision you will not regret.

What To Do After You’ve Found The Right Property

Finally, after months of research and probably with much-needed help from an investment consultant, commercial property management company, accountants, you name it, you now have the investment property you’ve been looking to have in Toronto. What’s left now is the financing and one or two other things to consider.

Do you have enough capital to fully finance your real estate property investment? If yes, arrange to meet with a real estate lawyer (to facilitate the transaction), an accountant (for tax purposes and other reasons), and a property management company (to manage your property and offer solicited advice in relation to commercial real estate investing in Canada).

However, if you need help raising the capital, read on to learn what you need to do.

Find Capital/Good Deal

In Ontario, you can access residential, commercial, and construction mortgages. Since you’ll probably be looking for a commercial one, it’s vital to be aware of the fact that the process involved in setting up a residential mortgage isn’t similar to the one used to set up a residential mortgage.

Before going any further, it would be better to know what would qualify as a commercial property. In Toronto, apartments, plazas, offices, malls, recreational properties, all fit under this category. Also, a residential property or a mixed-use property that is being rented or leased for profit can be categorized as a commercial property.

Now, without the help of a mortgage professional or investment consultant, it can be difficult to get an accurate estimation of the rates plus fees to expect when seeking a commercial mortgage.

Another thing is that the interest rate can be a little bit higher and the requirements stricter when compared to residential mortgages.

What’s The Approval Criteria?

Ordinarily, the value of most commercial mortgages tends to be high, which means the approval criteria won’t be as simple as it would be if it were a residential mortgage.

Before you get an approval, you’ll be subjected to a relatively more thorough assessment with respect to credit scores and income. The property assessment process will also be rigorous. Other factors the mortgage lender will take into consideration include debt service ratio, business profitability, and loan to value ratio.

Some lenders may ask that you supply them with financial projections, a business plan, and to state your business’s net worth.

Construction Mortgages

This type of mortgage is designed for investors looking to set up a new structure or upgrade an existing one. Unlike the other mortgages, it’s usually advanced in parts based on the different stages of a construction process; i.e., lock up (50% complete), drywall (around 75% complete), and completion (fully complete). To get approval, you are going to require a huge amount of equity and, of course, help from a mortgage professional.

Stay Off Failing Business

If the tenants you expect to occupy your property include bars, restaurants, grocery stores, or businesses that seem to be shifting their services and other operations online such as banks, it would be great to presume that they will fail to honor their financial obligation at one point. This is because of things like high failure rate (restaurants and bars), inconsistent revenue, tough competition, the temporary nature of business, and so on.

But you have a chance to avoid such business by doing research on failing businesses in Toronto. Once you’ve identified them, try as much as you can to avoid dealing with them. However, if you really have to endure that option for one reason or the other, you would be safer taking insurance coverage to take care of that rainy day when it comes.

Construction Matters

Once you’ve obtained the right land or an existing building and now is the time to pursue the construction or renovation process, there are a couple of things you will want to keep in mind so as to make your project a success. Earlier on, we mentioned the supply of skilled labor.

In addition to that, seek professional help from an operational efficiency expert on how to maximize the layout you’ve selected for your property.

Next, choose quality builders. First, they should be skilled, experienced, reputable, debt-free, and well-equipped to meet your needs. Remember, there may be industry standards to be met, depending on your type of project. Thus, you have to confirm with the builder that they have the expertise required in the sector your project falls in.

In Conclusion

Because investing in commercial real estate is a costly undertaking, the least you can do as an investor venturing into property markets is to understand and put into action what we’ve discussed in the three main stages we’ve looked at; i.e., (1) finding the best property investment opportunities, (2) how to know you’ve found the best property, and (3) what to do after you’ve found a good property.

Granted, there’s a lot you’ll encounter as you maneuver through the process of how to invest in commercial real estate. Expect successes and also common and uncommon challenges.

Should you get stuck, don’t hesitate to seek necessary help. Whether it’s an investment consultant, real estate agent, accountant, mortgage professional, commercial property management company, or any of the other experts we’ve mentioned in the article, Toronto has them all.

Good luck as you start off your journey to wealth.

Download our Free beginners guide to property management in the GTA

You have Successfully Subscribed!

By completing this form, you are consenting to receive marketing emails from Buttonwood Property Management. Your privacy is important to us. You can remove yourself from our list at any time by clicking on the Unsubscribe link at the bottom of any of our marketing e-mails. You can also contact us at [email protected]